Organizational Structure and the Behavior of Firms: Implications for Integrated Assessment

Existing climate/economy models typically treatproduction through the assumptions that firms maximizeprofits and that inputs are transformed to outputsaccording to a neoclassical production function. Yetthese assumptions are at variance with some of theknown empirical features of business behavior. One ofthe most promising ways to model firms morerealistically is to include organizational networkstructure as an integral part of the representation. The firm's optimization problem then includes not onlythe choice of inputs and outputs, but the choice of anorganizational structure as well. This approach makesit possible to examine in a unified framework a numberof issues pertaining to the internal workings of thefirm: the consequences of multiple organizationalobjectives, the possible existence of productivityspillovers from one activity to another, and thealgorithmic characteristics of procedural routines. Understanding how organizational structures influenceoverall performance is an important step towardsbetter representing firms in integrated assessmentmodels. Our results show that phenomena of the typecharacterizing the `Porter hypothesis' (improvedenvironmental performance without reduction inproductivity or profitability) can appear even in verysimple models of the firm, provided the effects oforganizational structure are taken into account.